Microsoft says upgrade now or pay big later

By John Fontana
Network World, 05/28/01

IT executives could face millions of dollars in extra costs to upgrade to the newest version of Microsoft Office, which ships this week, if they don't buy upgrade packages before the software giant's new license and maintenance program begins in four months.

Microsoft announced the changes earlier this month, but this week's launch of Office XP officially starts the licensing clock ticking. After Oct. 1, Office customers without upgrade rights will spend up to $300 more per user to purchase new licenses for Office XP.

The decision to delay an upgrade could mean $1.5 million in extra licensing costs for an organization with as few as 5,000 seats of Office. In addition, customers running Office on Windows 95 will have to upgrade their operating systems because Office XP does not run on that platform.

While companies on Office 95, 97 and 2000 need to make upgrade decisions before Oct. 1, they don't have to actually deploy the product by that date. Under the new upgrade program called Software Assurance, users must have a license to upgrade to the current version of the product, now Office XP, or pay significant costs to get that license.

Of course, IT executives can elect to do nothing and continue to run their current copies of Office, but that plan could result in a 40% to 70% increase in yearly cost for Office, according to Guernsey Research.

"Some will look at this as a holdup," says Chris LeTocq, an analyst with Guernsey Research. "With Office XP coming out, this is absolutely the time to sit down and decide what to do with Office."

LeTocq says corporations may decide to keep users who just need e-mail and a few applications such as Word on older versions and put power users on current versions under the new licensing.

"We know this is on our plate, and we know we have to decide," says John Masseria, manager of system support for Carnival Cruise Lines. "We are trying to stay on current software because it is more stable and cost-effective to support. But the question is how much do you want to pay."

Masseria says Microsoft's licensing changes are not unique; Unisys has changed terms on his firm three times in the past couple of years. "Microsoft is trying to figure out more ways to make money."

Other IT executives say they don't want to finance that plan.

"I'm concerned with this model because it costs me more money," says Dennis Kirk, manager of IT for the State of Oregon's Department of Environmental Quality. "It forces people to a maintenance program that costs more money than simply buying upgrades when you need them."

Kirk says the state holds an option to upgrade to Office XP for $211 per seat for its nearly 50,000 employees. "We're going to buy the upgrade and then sit on that version. We won't buy the Software Assurance," he says.

A recent Giga Information Group study predicts more than half of Office customers will upgrade to Office XP in the next year. About 55% of Office customers are using Office 97, while another 40% are on Office 2000 and only 5%, mostly home users, are on Office 95.

The majority of Office customers are on Microsoft's Select and Open licensing programs, according to Microsoft. Those programs offer a perpetual license, which means the user owns the software after the initial license lapses. Normally, those customers buy into an upgrade package when they need new software, but that option goes away with Software Assurance.

"For Open and Select customers, the most cost-effective route to Software Assurance is our Upgrade Advantage program," says Simon Hughes, program manager for worldwide licensing and pricing at Microsoft.

If customers join Upgrade Advantage before Oct. 1, they will pay a full-retail price of $292 per user, per year and receive the rights to an Office XP Professional upgrade and up to two years of Software Assurance. But after Oct. 1, when Software Assurance replaces Upgrade Advantage and other upgrade programs, companies will have to buy new Office XP licenses for $454. The optional Software Assurance is another $131 per user, per year.

Customers with more than 250 seats of Office also have the option after Oct. 1 of purchasing an Enterprise Agreement, a three-year license covering core Microsoft products. Pricing has not been announced.

Users who are currently on an upgrade program, including Enterprise Agreement, have until Jan. 31, 2002, to convert those licenses to Software Assurance. The cost is 29% of the full-retail price of the software.

Office has been Microsoft's cash cow, representing 37% of its yearly revenue. But during the past year, sales have been flat as companies have skipped versions. Those skips reflect on Microsoft's revenue stream.

But companies are getting plenty for their upgrade dollars, Microsoft says.

"For Office 97 users, XP is a compelling upgrade, and for Office 2000 users, there are some better features in XP," says Tom Bailey, lead product manager for Office.

Office XP includes enterprise features such as Smart Tags and SharePoint Team Services for data retrieval and collaboration between workgroups. It also offers error recovery that prevents loss of information in the event of a crash and a security update that protects Outlook from malicious attachments. New administrative controls make it easier to install and maintain the software. o

Microsoft says upgrade now or pay big later

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